EMC weakness.... S&P reviewed a number of tech stocks and gave five stars to KLIC, SUNW, FEIC and FLEX. Four stars were ORCL and ADI...three stars (hold) were EMC. The reason for the hold was because there was as follows....
>>>Q: People have been asking about EMC (EMC), the data-storage giant.
A: EMC is covered by Richard Stice with a 3-STAR [hold] ranking. He is neutral on the outlook for the data storage area. One positive for the group is that the World Trade Center attacks have renewed focus on the importance of storage. Disaster recovery capabilities are in the forefront of people's planning. A negative for the group is that there's some excess capacity, given that many companies purchased storage products during the Y2K buildup.
From Business week on line the entire article....
BusinessWeek Online
INVESTING -- "A Mending Year for Tech"
Personal Investing: INVESTING Q&A
Technology stocks are in the process of moving away from a market bottom and will start to shine again in 2003. In the meantime, 2002 is ``a mending year for tech,'' says Thomas W. Smith, the Standard & Poor's investment officer who heads the group of S&P technology analysts.
That said, S&P has an overweight recommendation on information technology stocks, especially those of software and semiconductor companies. Telecommunications equipment -- and the chip companies that serve them -- are still invalids, Smith says.
Among the names on S&P's buy list, Smith cites Sun Microsystems, contract manufacturer Flextronics, and small-cap stocks of FEI Company and Kulicke & Soffa. On the next rung down -- accumulate -- the recommendations include Oracle and Analog Devices.
These were among the comments made by Smith in a chat presented Feb. 12 by BusinessWeek Online and Standard & Poor's on America Online. Following are edited excerpts from this chat. A complete transcript is available from BusinessWeek Online on AOL at keyword: BW Talk.
Q: Tom, Nortel (NYSE:NT - news) revived the market's jitters today -- if they had ever really subsided. How do you see the outlook amid all this post-Enron nervousness?
A: Warnings from industry leaders such as Nortel always give investors pause. However, investors should bear in mind that the telecommunications-equipment group is one of the weaker areas among information technology industries. We still see warnings from equipment makers like Nortel and chip companies that serve them. This group should lag in the recovery. However, prices are already pushed down.
Q: How much of a tech-stock revival do you see now, Tom?
A: We are maintaining an ``overweight'' position in information technology, based on the strength we expect in semiconductor and software shares this year. As I say, other areas like communications equipment are laggards, and there are some special cases we like, including IBM (NYSE:IBM - news), Flextronics (NasdaqNM:FLEX), and DoubleClick (NasdaqNM:DCLK). Overall, 2002 is a mending year for tech, and we expect a more decisive recovery in 2003.
Q: Sun Microsystems (NasdaqNM:SUNW) at $9 and change sounds like a great buy. What's your opinion?
A: We, in fact, do have a 5-STAR [buy] ranking [in S&P's Stock Appreciation Ranking System] on Sun Microsystems...they are targeting a double-digit operating margin and plan to do stock buybacks...margins should improve materially in the near term, based on Web-based efficiencies and better product mix and component costs.
Q: What does Lucent Technologies (LU) look like now?
A: Lucent Technologies has a profile similar to Nortel, which is to say it's in a fundamentally weak industry in 2002. Our analyst following the stock, Ari Bensinger, has a 3-STAR [hold] ranking on the shares...things should get brighter for Lucent, but it looks like a laggard in the recovery.
Q: What's S&P's view on Analog Devices (ADI)?
A: Analog Devices is one of the premier high-end analog-chip companies. They also make DSP chips. Both these categories of chips are high-growth areas. Revenues have fallen in the downturn but remain in good shape for the upturn. We have a 4-STAR [accumulate] ranking on the stock.
Q: Your opinion on Oracle (ORCL)?
A: Oracle is a 4-STAR [accumulate] as ranked by our analyst Jon Rudy...Jon recently went with an ``overweight'' recommendation for the systems software industry. Oracle is a major player in the group and should do fairly well.
Q: Any thoughts on VeriSign (VRSN)?
A: VeriSign is currently a 3-STAR [hold]. It's active in the Internet-based ``trust'' services, including authentication, validation, and payment that are needed by Web sites and electronic-commerce service providers. This is a promising area of commerce, but for now, we just have a hold on the shares.
Q: You mentioned Flextronics briefly toward the top -- a bit more on it?
A: Flextronics is a 5-STAR [buy] as covered by analyst Richard Stice. He actually has a positive outlook for the whole electronics contract manufacturing sector. The group had been battered and beaten up in the downturn but should come back with the new up-cycle. Flextronics is the low-cost producer in the group and is our only 5-STAR. However, we have two accumulate-ranked stocks in the group: Celestica (CLS) and Sanmina-SCI (SANM).
Q: In that same group, what about (SLR)?
A: Solectron is another large player in that group. It's currently ranked hold. Also, Jabil Circuit (JBL) is ranked hold.
Q: Where do you see Advanced Micro Devices (AMD) going this year?
A: Advanced Micro Devices is currently ranked hold. They are embarking on a major change in chip architecture and launching the Hammer family of chips later this year. If they succeed in successful production ramps and the chip industry expansion takes off as we expect, they should see earnings recover from a small loss in 2001 to about 75 cents [per share] in 2003. They have done fairly well in their competition for PC processor market share against Intel (INTC), but Intel remains a production powerhouse with the ability to counter advances that AMD might make...Intel has a history of more stable operations and is also currently a 3-STAR [hold].
Both these companies should do well as the next chip expansion plays out. I should note that Intel has a Standard & Poor's earnings/dividend ranking of A, which indicates a fairly steady history of financial performance, and AMD has a ranking of B-, which is less than that of Intel, but not bad for a chipmaker. These rankings tend to look at a 10-year history, so cyclical companies such as chipmakers often do not have high rankings in this category.
Q: What about RF Micro Devices (RFMD)?
A: RFMD is currently ranked 2-STAR [avoid]. They make radio frequency integrated circuits for wireless phones and remote meter reading. Presently, they face a challenging revenue environment -- which means their markets are slow. They should do better as the economy comes back in 2003 and 2004. But for the near term, we would avoid the shares.
Q: How about chip-equipment makers Applied Materials (AMAT) and Lam Research (LRCX)?
A: Applied Materials is reporting even as I speak. They are the leader in the semi equipment area, accounting for about one-quarter of all spending on wafer-fab equipment. They, like other chip-gear makers, have seen revenues cut way back through the bust year of 2001, and 2002 is likely to also be a down year. However, at some point, the cycle will pick up again, and these brand-name equipment makers will have their heyday.
The timing is always unclear, but we are beginning to think more positive thoughts about the group. LRCX is also a hold. These two have some stream of income from leading-edge equipment needed for 300-millimeter wafer technology, which is the next step up from 200-millimeter technology -- which is still the standard size. Capital spending for 200-millimeter plants is very slow, but spending for 300- millimeter equipment is a little better.
Two companies we like in the group are FEI Company (FEIC) and Kulicke & Soffa (KLIC). These two are both smaller-cap companies and 5-STAR buys. FEIC makes ion-beam microscopes. The idea here is inspection becomes increasingly important at smaller line widths, so FEIC's equipment is becoming more critical for leading-edge technology. KLIC makes wire bonders and other products for packaging of chips after they have been completed on the wafer. KLIC is often an early mover when an expansion starts. The risk here is that we may be too early with the buy call.
Q: People have been asking about EMC (EMC), the data-storage giant.
A: EMC is covered by Richard Stice with a 3-STAR [hold] ranking. He is neutral on the outlook for the data storage area. One positive for the group is that the World Trade Center attacks have renewed focus on the importance of storage. Disaster recovery capabilities are in the forefront of people's planning. A negative for the group is that there's some excess capacity, given that many companies purchased storage products during the Y2K buildup.
High valuations are something of a concern for the group. The second half of 2002 should offer a better revenue environment as the economy comes back. In the long term, the buildout of the Internet and movement of information by e-mail will require significant storage facilities, so a long-term horizon may work out pretty well for EMC and the storage group.
Q: Any thoughts on the general market? Is it still overvalued? Or is p-e overrated? And what about tech valuations specifically? You just mentioned concerns in data storage.
A: Valuations are still a cause for concern in the technology area. However, as the economy comes back, earnings should come back for these companies, and we think that current valuations will be justified. For a group such as semiconductors, valuations may reflect that we're halfway into a recovery, when in fact the recovery is just getting started. For many chip companies, the September or December quarter of 2001 was the bottom for revenue, so a fundamental bottom was made, but the stock prices raced ahead in October and November to reflect that initial move off the bottom.
Technology is in the process of putting in a major fundamental bottom. In some cases, the stock prices have run ahead. In some cases, they have not run ahead, like Nortel and Lucent. So investors have a spectrum of choices at this stage. You can choose chipmakers that have no inventory overhang, or software makers or service providers that have steady income, and expect to pay fair valuation for those, or you can proceed more speculatively and try to pick companies that are still washed out, such as Nortel and Lucent, or chipmakers such as AMCC [Applied Micro Circuits], PMCS [PMC Sierra], and others whose stocks are low now and apt to remain low for a long while because the end market recovery will be slower. S&P works with a 6- to 12-month time horizon on our STARS picks, so those of you with an eye for a 4- or 5-year horizon need to do some more thinking on your own.
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